When Daniel Masters walked into a bitcoin conference in Amsterdam last year, he had spent more than a decade riding the boom in commodities markets. Held at the city’s sleek Passenger Terminal venue, it was far from the typical gathering of oil traders he was used to attending.
The chief scientist of the Bitcoin Foundation, an advocacy group for the controversial virtual currency, wore a shirt emblazoned with the word “geek”. Patrick Byrne, chief executive of Overstock, a retailer, who had spent years railing against Wall Street and short-sellers, gave the keynote speech dressed in a Chinese suit from Shanghai Tang and quoted Marx, Hegel and Kant.
The informality did not tip over into triviality, though. “I didn’t know what I was going to find. But the minute I walked in, I realised it was a very serious proposition,” says 51-year-old Mr Masters, who started trading oil in the 1980s at Shell, decades before bitcoin’s creation in 2009 and its subsequent adoption by the libertarian tech community.
“You got a sense of the body corpus of the bitcoin industry, and it’s solid. This had just the most spectacular energy around it, and that’s when I said ‘this is absolutely for real,’” he recalls.
The conference was a turning point for Mr Masters, giving him confidence in his instinct that this was a career change worth pursuing. A few months later, in July, authorities in Jersey approved the Global Advisors bitcoin fund he runs with his business partner.
The fund buys and sells bitcoin in a bid to take advantage of its price movements. Other funds set up in the US are yet to receive approval from the Securities and Exchange Commission.
Having suffered bouts of hair-raising volatility, frauds, and the high-profile collapse of an online marketplace that sold illegal drugs for bitcoin, the sector is now attracting a more mainstream crowd.
While early enthusiasts saw the virtual currency as enabling anonymity, the collapse of borders and freedom from traditional banks and middlemen, many of the new entrants have worked for the world’s largest financial institutions. Larry Summers, former treasury secretary, and John Reed, former Citibank chief executive, have joined the advisory board of Silicon Valley bitcoin start-up Xapo, it announced in May.
Still, in the investment business, Mr Masters is somewhat of an outlier, betting on the future value appreciation for bitcoin. For regulators, there are still concerns. The SEC issued a warning last May to investors about the risks of fraudulent bitcoin and virtual currencies products.
Last year, HSBC cut its ties with Mr Masters’ companies after 15 years, when he approached them about acting as banker for the bitcoin fund, because of fears about the risk of money laundering, he says. Mr Masters says the fund went through a stringent approval process with the Jersey Financial Services Commission.
Those pursuing similar projects to Mr Masters’ are few. In 2013, Barry Silbert launched the Bitcoin Investment Trust, which this year allowed investors to trade its shares on an over-the-counter marketplace. The fund is not registered with the SEC. And a bitcoin exchange-traded fund set up by the twin brothers Cameron and Tyler Winklevoss, who achieved fame through their involvement with Facebook, is still waiting to be approved.
But interest in the sector is growing. Mr Master’s ex-wife Blythe Masters, a JPMorgan veteran who played a key role behind the development of credit- default swaps, this year became chief executive of Digital Asset Holdings, a virtual currency start-up that aims to settle digital and financial assets using the blockchain, the technology behind bitcoin that records its digital transactions.
That technology is expanding bitcoin’s reach into the boardrooms on Wall Street as banks and exchanges assess how they might make use of it. But as a means of payment, it is still nowhere near to being widely used. The market capitalisation of all bitcoins hovers at about $4.16bn, a fraction of the global currency market. Consumers are more likely to use a Starbucks app on their phone to buy coffee and PayPal to send money to a friend than bitcoin.
For Mr Masters, it is an investment opportunity. It has all the characteristics of the oil market when he first started at Shell in London in 1985, he says, being volatile, periodically illiquid and sparsely regulated.
It was at Shell in 1986 where he first met Russell Newton, his business partner. In 1999, after Mr Masters had gone on to hone his skills as a trader at Phibro Energy, one of the biggest oil traders of the time, and run the energy business at JPMorgan in New York, the pair set up a commodities fund, Global Advisors.
His fund started buying oil at $15 and $16 a barrel for delivery years later, probably buying more than $1bn, he says. His best year was 2000, when the fund returned 40 per cent and had average assets of $180m.
The commodity fund was closed in 2013, as investors withdrew their money and commodity prices peaked due to China’s slowing growth. A year later, Mr Masters dived into bitcoin, where he advocates a similar buy and hold strategy overall.
Demand for bitcoins is likely to increase as it is used for small quick payments through social media such as Facebook for reading news or renting out your WiFi, he believes. It will coexist with digital platforms such as Apple Pay and PayPal, which transfer conventional currency, but it will be used more in cross-border exchange.
Bitcoin and its technology can better integrate with our digital lives than current payment settlement systems, which are already decades old, he says.
“It’s not about ‘we’re trying to screw the banks’, or hackers taking over finance — it’s nothing to do with that. This is a technology which offers opportunity and utility that simply doesn’t exist in the current system.”
But riding the volatility of bitcoin through Mr Masters’ fund will require investors to place a large amount of trust in him, rather than buying bitcoin directly. Trust is a problem that has bedevilled the digital currency’s development, especially since an ever- expanding number of companies have sprung up to offer services for buying, holding, and selling bitcoin, at a fee.
Similar to oil in the late 1990s, when investing directly was rare, he wants to bring more investors into bitcoin. His fund has attracted 10 investors including wealthy individuals, family offices, and two global money management firms. The invested amount ranges from the $100,000 minimum to $600,000 per investor, he says. It is up more than 20 per cent this month because of the turmoil over Greece.
Unlike many who attend bitcoin conferences, Mr Masters believes the digital currency can flourish only in partnership with legacy financial institutions, such as the large banks.
There has been a clear change since he started the fund among banks and governments, he says. “The lesson of the last year or two is the more transparent, the more embracing of regulation, and the less libertarian and confrontational you are, the better your bitcoin business does.”
Source: http://www.ft.com/intl/cms/s/0/98189e2a-2af2-11e5-acfb-cbd2e1c81cca.html